Consolidated financial statements provide an overall picture of the financial health and performance of a company and its wholly owned or majority-owned divisions and subsidiaries. Consolidated financial statements deliver information on all these separate entities as if they were one aggregated entity. The consolidated balance sheet, income statement and cash flow statement combine a company's activities across all business holdings in which it holds majority stakes.

Subsidiaries

A subsidiary is a separate company of which a holding company or parent company owns the majority of the stock, membership interest or other ownership stake. For example, your interior construction company may own 100 percent of a separate handyman services company. Your interior construction company is the parent company, and the handyman services company is the subsidiary. If your company owns several subsidiaries, your company may be referred to as a holding company, since it "holds" ownership stakes in several companies.

Consolidated Statements

Your company's consolidated financial statement combines the parent company's financials with that of its holdings -- subsidiaries, strategic investments and joint ventures -- in one package. If your company's management, lenders or investors want a clear picture of how the overall company is performing, then including all the subsidiaries it owns provides this. Viewing only the parent company's financials alone may provide a distorted view. Companies consolidate to accurately present the financial condition and results of subsidiaries as though they were one.

Inclusion of Subsidiary

Your company must own at least 50.1 percent of your subsidiary for it to be included in the consolidated financial statements. If your company jointly owns a subsidiary with another company and has a 60 percent ownership stake, you would include this subsidiary in your company's consolidated financials even if the other company controls the subsidiary's activities. When determining whether or not to consolidate, generally ownership percentage matters, not voting or operating control.

Consolidation Process

Consolidated financial statements are not maintained on an ongoing basis. Instead, they are compiled at the end of an accounting period, typically a quarter or year, using the separately maintained accounting records from each subsidiary and the parent. This means your subsidiary keeps a set of books and so does your parent company. Then you combine the two sets of books and remove any overlaps to produce the consolidated statements.

Consolidation Process Detailed

To consolidate, first prepare the financial statements for your parent company and its subsidiary. Next, use a separate worksheet for each statement to remove any intercompany transfers or sales. Your company cannot sell, transfer cash or assets or make loans to itself so these adjustments are crucial to eliminate any double counting. Then, add each statement together with the adjustments. For example add your parent company's balance sheet, the subsidiary's balance sheet and the balance sheet adjustments. The final product is a set of consolidated financial statements.

About the Author

Tiffany C. Wright has been writing since 2007. She is a business owner, interim CEO and author of "Solving the Capital Equation: Financing Solutions for Small Businesses." Wright has helped companies obtain more than $31 million in financing. She holds a master's degree in finance and entrepreneurial management from the Wharton School of the University of Pennsylvania.